In a recent directive, the Central Bank of Nigeria (CBN) has instructed commercial banks to refrain from utilizing their foreign exchange revaluation gains for dividends and operational expenditures.
The directive, conveyed through a letter dated September 11, 2023, and signed by Haruna Mustafa, the Director of the Banking Division Department, is set to be implemented immediately.
Foreign exchange revaluation gains refer to the increase in the value of a bank’s assets and liabilities denominated in foreign currency when there is a change in the exchange rate between the foreign currency and the local currency.
The CBN expressed its concern regarding the potential impact of the recent FX rate regime change on the banking system, particularly on the Naira values of banks’ foreign currency (FCY) assets and liabilities.
While the FX reforms had adverse effects on some businesses in the first quarter of 2023, Nigerian banks largely remained profitable.
The CBN has outlined that FX revaluation gains should serve as a counter-cyclical buffer, helping banks guard against potential adverse fluctuations in FX rates.
The directive underscores the importance of banks utilizing these gains to strengthen their capital reserves, thereby enhancing the banking sector’s capacity to withstand volatility and economic shocks.